Bulletin

Dollar higher after inflation report

Federal Reserve's Beige Book finds slower growth

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar rose against major foreign-exchange counterparts Wednesday, after a government report showed accelerating inflation and as traders continued to reduce bets against the U.S. currency.

But the greenback surrendered some gains after a Federal Reserve Beige Book survey of current economic conditions indicated slower economic growth and moderating inflationary pressure.

"As expected, the Beige Book is on the dovish side and should serve to highlight the Fed's pause continuing for the foreseeable future," said Brian Dolan, director of research at Forex.com, a division of Gain Capital. "This should see the dollar come under pressure."

Late in New York, the euro was quoted at $1.2808, compared with $1.2818 late Tuesday. The dollar changed hands at 116.58 yen, compared with 115.94 yen.

The British pound traded at $1.8845, compared with $1.8936. The dollar was last at 1.2349 Swiss francs, compared with 1.2335 francs.

Five of the 12 Fed districts reported a "deceleration" in growth in their regions, while the other seven reported continued moderate growth. The reports of slower growth were clustered in the Northeastern region and in Kansas City.

There was no sign that inflationary pressures are heating up. Although there were sustained increases in the cost of metals and energy and other raw materials, the report found "most of these increases do not appear to have passed through to finished consumer goods. See full story.

"The tone [of the survey] is a little less upbeat than in recent reports," said currency strategists at research firm Action Economics. "The dollar has been somewhat sensitive to U.S. growth prospects of late, and the Beige Book seems to confirm at least some cooling."

Unit labor costs at 16-year high

The Labor Department said productivity increased an annualized 1.6% in the second quarter, up from 1.1% reported a month ago. Unit labor costs increased 4.9% annualized, revised from 4.2% earlier.

Economists were expecting productivity to be revised up to 1.5% and unit labor costs to be unrevised at 4.2%, according to a survey conducted by MarketWatch. See full story.

The greenback showed little reaction after the Institute for Supply Management said nonmanufacturing sectors of the U.S. economy expanded at a faster pace during August.

The ISM nonmanufacturing index rose to 57% from 54.8% in July. Economists were looking the index to only rise to 55.4%. Inflation pressures eased. The price index slipped to 72.4% from 74.8% in the previous month.

After 17 straight meetings in which it implemented quarter-percentage-point increases in benchmark interest rates, the Fed held interest rates steady at 5.25% on Aug. 8. The Federal Open Market Committee, the Fed's policy-setting panel, next meets Sept. 20.

BoJ rate meeting ahead

Meanwhile, investors also looked to the Bank of Japan's two-day policy board meeting starting Thursday. Most economists expect the bank to leave its interest rates unchanged at 0.25%.

However, speculation has risen that BoJ governor Toshihiko Fukui will sound hawkish by signaling that a rate hike is likely later this year.

Some analysts say Fukui is likely to emphasize the elements of continuity in the bank's outlook for the economy and prices and stick to the established mantra about further policy action being gradual.

"With the prospect of further interest rate hikes from BoJ this year still in doubt, speculative players trying to put on fresh carry trades availed themselves of the opportunity to establish lower entry points by purchasing dollar/yen below the 116.00 level," said Boris Schlossberg, senior currency strategist at FXCM.

"The yen, though grossly oversold, still holds no great catalyst to attract buyers and as such is likely to flounder in the range for the time being," he said.

The yen hit two-week highs versus both the dollar and euro Tuesday after better-than-expected corporate capital spending figures prompted traders to trim bets against the Japanese currency.

Increased expectations that the upcoming meeting of the Group of Seven leading industrial nations will again call for flexibility and appreciation of Asian currencies have provided some support for the yen in recent sessions, according to analysts.

Elsewhere, the Bank of Canada on Wednesday left its target for the overnight rate on hold at 4.25%, as widely expected.

The accompanying statement said "the underlying trends in the Canadian economy appear to be in line with the broad thrust of the Bank's July projection in terms of output and inflation."

The bank added that "in line with this outlook, the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term."

Michael Woolfolk, senior currency strategist at The Bank of New York, said the bank removed earlier statements' reference to "the possible need for modest further tightening," suggesting the BoC is likely to remain on pause for the remainder of the year.

"The BoC can afford to remain on hold for the time being with core [consumer price inflation] well contained and crude oil below the $70 per barrel mark," he said.

The Reserve Bank of Australia also left its official cash rate unchanged at 6% following its September board meeting, as expected.

The Canadian dollar was last up 0.5% at $1.1057 against the U.S. dollar. The aussie traded at $0.7661, down 0.4%.

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